Q.

1
It is claimed by a consumer advocacy group that a specific car model obtains a mean of 35 miles per
gallon on the highway with a standard deviation of 2 miles per gallon. The advocacy that
manufactures the car claims that it exceeds this estimate in highway driving. To support its
assertion, the company randomly selects 81 cars. The company conducts an appropriate hypothesis
test at level of significance 0.025.
a. What is the probability of making a type I error? If they would use 64 cars instead, what would
be the probability of making a type I error?
The probability of making type I error is the level of significance of the test of hypothesis. In this
example it is 0.025.
If sample size is 64 and level of significance of the test hypothesis is 0.025, the probability of
making type I error remains 0.025.

b. If the p-value is equal to 0.08, what was the value of the sample mean of 81 cars?
If p-value is 0.08, it is greater than the level of significance, which indicates, the sample mean is
not significantly different from the population mean. Hence, the sample mean will be equal to
35 miles per gallon.

c. If the CEO claims that the mean is different than 35 miles per gallon, what would be the p-
value assuming the same value of xbar and n?
P-value will be 0.0125

d. A consumer advocacy group wants to constructs a 95% confidence interval for the true mean
fuel efficiency. She takes a random sample of 64 cars and computes the sample mean to be
equal to 35.55 (Assume that the population standard deviation is still 2 miles per gallon.) FIRST,
construct the 95% confidence interval. The advocacy group believes that there is a 95% chance
that the true mean is between the two numbers you just computed. SECOND, please respond to
this claim.

,
64, 35.55, 2
2
95% 1.96
64
35.55 0.49
95% (35.06, 36.04)
Given
n x SD miles per gallon
CI x
CI
= = =
=
=
=


The true mean 35 is outside the 95% confidence limits.
Hence the claim that the mean is 35 miles per gallon on the highway is rejected. Hence at 95%
confidence level, it can be concluded that the mean is greater than the 35 miles per gallon.
Q.2
The daily returns on a portfolio are normally distributed with a mean of mu and a standard deviation
of 0.005.
a. If the probability that a daily returns is greater than 0.005 is 0.38, find mu.
,
( 0.005) 0.38
0.005
0.38
0.005
,
0.005
1 0.38 0.62
0.005
,
( 0.30) 0.62
0.005
0.30
0.005
0.0065
Giventhat
P x
x
P Z
Hence
x
P Z
Hence
P Z
x
x
> =
| |

> =
|
\ .
| |

< = =
|
\ .
< =

=
=


b. What is the probability that the daily returns on that portfolio are positive for at least 54 out
of the next 100 days?
:
0 0.0065
( 0) ( 0) ( 1.3) 0.9032
0.005
To find
P x P x P Z P Z
| |
> = < = < = < =
|
\ .

This is the probability that the returns on that portfolio are positive on a single day.
Hence the probability that the returns are positive on 54 days out of 100 days is:
The mean number of days = n*p= 100 * 0.9032=90.32
And SD = n *p *q = 100 * 0.9032 * 0.0968 = 8.743
Let y denotes the number of days with positive returns.

Hence, required probability can be calculated as:
54 90.32
( 54) 1 ( 4.154) 1 0.0000163 0.99998
8.743
P y P Z P Z
| |
> = > = > = =
|
\ .






c. What is the probability that the average return for the portfolio over the next 100 days is
equal to 0.0012?
The probability that the average return for the portfolio over the next 100 days is equal to 0.0012 is
equal to zero. Since for continuous random variable, the probability at a certain point is always equal to
zero.



Q.3
A large city is contemplating a ban on smoking in public spaces. The city council wants to institute
such a ban only if more than 70% of the adults living in the city support it. To find out if such support
exists, the city manager randomly selects 150 of the adult residents in the city and asks them
whether or not they support the ban. Of the 150 citizens, 108 support the ban and 42 do not. Is
there sufficient statistical evidence to conclude that the strong support for the ban is present among
the citys residents? Show your work and explain your answer.
,
150,
inf ;
108
0.72
150
42
0.28
150
95% ' '
95% 1.96*
0.72*0.2
0.70 1.96*
Given
n
p proportionof citizens whoarein favour
q proportionof citizens whoarenot in favour
Fromgiven ormation
p
q
The Confidence Interval for p is
pq
CI P
n
=
=
=
= =
= =
=
=
8
150
0.70 0.07185
(0.62815, 0.77185)
=
=

Hence, this interval includes value 0.72 (sample Proportion). Hence at 95% confidence, it can be
concluded that, there is no strong support for the ban is present among the citys residents.
Q.4
(a) Answer
Given, p = 0.5, n=100
Hence mean = np = 50,
SD = sqrt (npq) = sqrt(100*0.5*0.5)= 5
Hence the 95% CI for the proportion is,
*
95% 0.5 1.96*
0.55*0.45
0.5 1.96*
100
0.5 0.0975
(0.4025, 0.5975)
(0.55) 95% lim .
.
p q
CI
n
Hencetheobserved proportion lies within confidence its
Hence weaccept thenull hypothesis
Henceit canbeconcluded that thequarter is fa
=
=
=
=
. ir


(b) Answer
*
95% 0.5 1.96*
0.55*0.45
0.5 1.96*
500
0.5 0.0436
(0.0.4564, 0.5436)
(0.55) 95% lim .
.
p q
CI
n
Hencetheobserved proportion lies outside confidence its
Hence wereject thenull hypothesis
Henceit canbeconcluded that thequarter i
=
=
=
=
. s not fair





(C) Answer
In the first situation, number of trials are 100 and in second situation, the number of trails are 500.
With larger number of trials, the proportion of heads and tails approaches 0.5.
In second situation the 95% confidence interval is short as compared to the confidence interval in
second situation.
Hence, with small number of trials, we conclude that the coin is fair (with 55 heads) and with 100
trials, we conclude that the coin is not fair (with 55 heads).


Q.5 Answer:
48432
1500
400
48460
,
48432 48460 28
0.3733
1500
75
400
n
x
Here
Z

o
=
=
=
=

= = =

Hence Probability of Type II error is:
Pr(Z<=-0.3733) = 0.35446